CHEMICALS OUTLOOK: Paraxylene banks on China downstream demand recovery in H2

The paraxylene market will be counting on a much awaited return of Chinese downstream demand in the second half of the year, as sentiment remains sluggish on the back of capped buying interest, growing supplies and a weaker-than-expected draw of aromatics from Asia to the US for blending into gasoline.

Chinese downstream demand has done little to stoke any optimism in the market despite high expectations at the start of the year.

A much anticipated pull of aromatics from the US for blending into gasoline also fizzled out leading to PX prices moving lower in the run-up to the summer driving season while stuttering consumption trends in the US did little to bolster sentiment. With the driving season nearing commencement and despite a recent improvement in consumption trends in the US, there is limited scope for a last minute pull of PX and other aromatics cargoes from Asia given longer shipping times involved.

Currently, margins for PX producers have remained stable with the spread between CFR Taiwan/China PX and C+F Japan naphtha holding above $350/mt though down from a record high of $483.83/mt on March 20, 2023.

Market participants suggest that the spread could continue to stay perched above $350/mt for the next few months which could provide some incentive to PX producers to maintain operating rates in the second half of the year.

However, growing supplies remain a concern as plant turnaround season ends and current capacities come back online though no new PX plants are expected in China for the second half of the year.

So far in 2023, PetroChina's Guangdong Jieyang plant commenced operation with a capacity of 2.6 million mt/year along with CNOOC Daxie having a capacity of 1.5 million mt/year.

The operating rates for these plants was fairly limited which helped cap supplies but are expected to rise steadily over the next few months. Meanwhile, CNOOC's new plant in Huizhou is expected to commence operations in June for its 1.5 million mt/year plant.

The only likely support emerging so far for PX prices is the growing capacity of PTA plants in China and the fairly high operating rates for polyester manufacturers.

Polyester producers in the country have raised operating rates back up to around 92% as more PTA plants come online and steadfast optimism that Chinese demand recovery is not too far away.

"I think China is currently supported by intention of PTA makers to run [so] that could support PX for now," a trader in China said.

Post China's re-opening after the COVID-19 induced lockdowns, market players were expecting strong demand growth especially from Q2 2023 onward.

But with little of that materializing so far, the focus has now shifted to Q3 2023 though some market participants have even written off 2023.

"I am actually looking at 2024 [since] 2023 is almost done," a PTA producer in China said.

The early promise of China's reopening was reflected in the sharp rise in PX prices at the start of the year and vigorous buying trends visible in the market. But as reality of lackluster Chinese demand became increasingly evident, the enthusiasm began to wane.

The global economic situation will also be watched, as fears of a recession continue to loom large on the horizon.

Struggling economies in both US and Europe have dampened Chinese polyester exports further, weighing on sentiment.

Chinese domestic consumption has shown marginal improvement but remains low for polyester finished goods so far. Furthermore, the weakness in key Chinese export markets such as the US and Europe spurred by the ongoing economic downturn have also crushed demand for polyester finished goods.

Even China's economy is being cautiously watched with eyes on employment rates, domestic consumption trends and thirst for travel within the country.

Market participants remain hopeful of a turnaround in the Asian giant's fortunes by Q3 while domestic gasoline consumption could surge during the upcoming long holidays in October.

Weak eurozone

In Europe, demand in the PX spot market is expected to remain weak, coupled with weak downstream demand from PTA and PET markets which is likely to weigh on the latter's consumption.

Due to cooler-than-expected weather in May, alongside inflation eating into end-consumer purchasing power, consumption of PET bottles has remained lower than normal in the region.

With PET consumption remaining sluggish within the continent, the impact will also be felt on demand for PX and PTA.

Production of PX for spot consumption is also touted to remain low within Europe amid poor economics given the stiff competition faced from comparatively better priced Asian product.

"Big producers won't produce until 2024" a distributor said.

US' gasoline bet

On the US front, PX imports found some support in the early part of 2023 on expectations of healthy blending demand in the run-up to the summer driving season.

Paraxylene imports rose 80% on the year in the first quarter of 2023, according to US International Trade Commission data.

PX imports totaled 270,048 mt in January-March, higher than 149,904 mt in 2022.

However, the initial euphoria seemed to quickly fizzle out as weak consumption trends in the US amid bearish macroeconomic fundamentals. Furthermore, refiners in the US were also much better prepared this year compared to the previous year with a gush of imports seen last year unlikely to repeat itself.

PX exports fell 24% on the year to 191,776 mt.